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Comparative Investing Multiples Analysis (trade multiples, market approach, comparable company analysis, relative value analysis): A comparison between two financial measures used to determine the value of a target company. The most common methodology for individual equities is based on comparing certain financial ratios or multiples, such as the price to book value, price to earnings, EV/EBITDA, etc., of the equity in question to those of its peers. For example, if one companies' stock price trades at a EBITDA multiple (value/EBITDA) of 5.0x, then a similar company can be expected to trade at a similar multiple in the market place. To find the value of the target company, multiple the 5.0x times (value/EBITDA) the target targets companies EBITDA number. The result is the value of the target firm. Accuracy of any ratio depends on the similarity of the companies in question.
Importance to Investors:
- This measure relies on the similarity of companies. Whereas, dissimilar companies should be rewarded or penalized when a target companies' performance is above or below that of the similar company or industry. Second, any multiple relies on the market determining the appropriate price for an investment. When these factors are controlled, multiple analysis can accurately provide a financial comparative measure for your target company. For example, if you have one red car selling for 5,000 dollars and an identical red car with no selling price on it, you can assume that the cars - if truly similar - would sell for the same price. Any differences in price most be explained and proven as valid points.
Short Definition
Multiple in financial terminology is a metric used in valuation of companies. The most commonly used multiples are: P/E (Price earnings ratio), EV/EBITDA (Enterprise value to Earnings before Interest, Taxes, Depreciation, and Amortization).
In some industries, sector-specific multiples are also used, such as EV/capacity, EV/output.
A method for determining the current value of a company by examining and comparing the financial ratios of relevant peer groups, also often described as comparable company analysis or comps). The most widely used multiple is the price-earnings ratio (P/E ratio) of stocks in a similar industry. Using the average of multiple PERs improves reliability but it can still be necessary to correct the PER for current market conditions.
Long Definition
Source: http://en.wikipedia.org/wiki/Valuation_using_multiples
See also
- Capital asset pricing model
- Weight Average Cost of Capital (WACC)
- Beta Coefficient
- Alpha
- Country Risk Premium
- Debt
- Debt Percentage of Capital
- Discount Rate
- Equity Capital
- Equity Percentage of Capital
- Equity Risk Premium
- Free Cash Flow
- Margin of Safety
- Required Return of Debt
- Required Return of Equity
- Risk Free Rate
- Value Investing
See Related Analysis
See Related Resources
- WACC Discount Rate Model
- Private Equity Discount Rate
- WACC Calculator
- Market Approach Template
- Basis Market Approach Template
- Firm Multiples
- Risk Free Rate 1
- Risk Free Rate 2
- Risk Free Rate 3
- Risk Free Rate 4
- Cost of Debt (required return)
- Search for Betas
- Treasury Yield
- Cost of Debt - Corp Bond Yields
- Bond Yields
- US Treasury Yields
- Daily US Treasury Yields
Source: http://en.wikipedia.org/wiki/Capital_Asset_Pricing_Model
